Cannot maximize Saver's Credit when MFJ

[Maigahane]

So I was playing with the numbers trying to see what our net pay would be if we maximized our retirement plan contributions and I found out that you cannot maximize the Saver's Credit when filing Married Filing Jointly (maybe with other filing options...I didn't look at them)

You can get up to 50% of your contributions up to $2000 each as a credit so in theory two people can get a $2000 credit. BUT that 50% caps at $35,500 AGI, then it drops to 20% so....

$35,500 - AGI
-$12,200 - Standard Deduction
-$7,800 - Personal Exemptions
=15,500 taxable income which is all taxed at 10%
x 10%
=$1,550 taxes
The credit isn't refundable so you can only take up to your tax liability meaning you lose $450 of that credit

Why write the law that way when you can't take the max amount? Am I missing something?

[Emilyngh]

Huh, very interesting.

I've actually been trying to maximize it myself and irritated that I couldn't.   But, I didn't look at it like you just broke down and thought that I had just set something up incorrectly.   But, looking at your numbers, I think you're correct.

[teen persuasion]

I've come to the same conclusion!

The saver's credit sounds really great, but since it is non refundable it is completely useless to us (MFJ with kids) - by the time our AGI is high enough to owe taxes, we'd be phased out of the credit. I've been exploring ways it could benefit us after the kids are all off our taxes, say to offset any Roth pipeline taxes, but it's limiting. Stay below the 50% limit and can't use all of it, go a single $ above and it is no longer enough.

I really can't figure out a scenario where it the cutoffs and amounts make any sense.

[Roland of Gilead]

I will run the numbers through my 2013 tax software.  There has to be a way to get the full credit.

[Maigahane]

So just to play, for a single person 50% of $2000 is a max credit of $1000:

$17,750 - Max AGI for 50%
-$6,100 - Standard Deduction
-$9,900 - Personal Exemptions
=7,750 taxable income which is all taxed at 10%
x 10%
=$775 taxes
So you're losing out on $225 of the credit

Head of Household, max credit is still $1000
$26,625 - Max AGI for 50%
-$8,950
-$7,800 Personal exemptions (assuming one kid)
=9,875 taxable income which is all taxed at 10%
x 10%
=$988 Taxes
So you're only losing out on 12 of the credit this way...

[Maigahane]

I've come to the same conclusion!

The saver's credit sounds really great, but since it is non refundable it is completely useless to us (MFJ with kids) - by the time our AGI is high enough to owe taxes, we'd be phased out of the credit. I've been exploring ways it could benefit us after the kids are all off our taxes, say to offset any Roth pipeline taxes, but it's limiting. Stay below the 50% limit and can't use all of it, go a single $ above and it is no longer enough.

I really can't figure out a scenario where it the cutoffs and amounts make any sense.

Lol, played with that as well, one dollar over on the AGI costs you $753 in extra taxes (for MFJ)

[szmaine]

I read recently that the average savers credit is only a couple hundred..this article goes into it at the end.

http://money.usnews.com/money/retirement/articles/2014/01/13/tips-for-claiming-the-retirement-savers-credit

[seattlecyclone]

The only way I see that you could get the full $2k is if you had at least $450 of AMT (alternative minimum tax) liability. The vast majority of couples with an AGI of $35.5k will not even come close to owing AMT. However, it is possible. If the couple exercised incentive stock options with a spread of at least $55k, they could owe enough AMT to claim the full saver's credit. It's a pretty rare scenario though.

[ch12]

Yes, it seems to be impossible to actually get $2000 in tax credit. However, it's a good tool - and people who are cut to the 10% level certainly can get all of theirs. :)

http://blog.personalcapital.com/financial-planning-2/average-american-pay-no-taxes/

[Emilyngh]

However, it's a good tool - and people who are cut to the 10% level certainly can get all of theirs. :)

I agree and I'm still a fan of it (just interesting to know).   We claimed the 20% ($800 for 2013) and my goal is to get our AGI down enough to claim the 50% for 2014.   IIRC, we would only see around $400 more through the credit, but this is still a great return on the extra $3kish that we'd have to put in tax-deferred accounts to get our AGI to this level.

[Mazzinator]

I've come to the same conclusion!

The saver's credit sounds really great, but since it is non refundable it is completely useless to us (MFJ with kids) - by the time our AGI is high enough to owe taxes, we'd be phased out of the credit. I've been exploring ways it could benefit us after the kids are all off our taxes, say to offset any Roth pipeline taxes, but it's limiting. Stay below the 50% limit and can't use all of it, go a single $ above and it is no longer enough.

I really can't figure out a scenario where it the cutoffs and amounts make any sense.

I may be wrong, but i thought the savers credit is given before the child credit. In other words, you'd still get the savers credit then a refund for the child credit (in refund status) hopefully i'm explaining/asking this clearly.

[Mazzinator]

I've come to the same conclusion!

The saver's credit sounds really great, but since it is non refundable it is completely useless to us (MFJ with kids) - by the time our AGI is high enough to owe taxes, we'd be phased out of the credit. I've been exploring ways it could benefit us after the kids are all off our taxes, say to offset any Roth pipeline taxes, but it's limiting. Stay below the 50% limit and can't use all of it, go a single $ above and it is no longer enough.

I really can't figure out a scenario where it the cutoffs and amounts make any sense.

I may be wrong, but i think the savers credit is applied before the child credit (in which you could still get a refund) I don't think not having kids on your taxes makes a difference here.

[teen persuasion]

We're at $0 taxable due to 3 kids still on our taxes (3 more exemptions) and DH maxing his 401k; all of our child tax credit is already the refundable portion.

[Emilyngh]

I may be wrong, but i think the savers credit is applied before the child credit (in which you could still get a refund) I don't think not having kids on your taxes makes a difference here.

It is.   But, in qualifying for the saver's credit there's testing to make sure that don't claim more than your liability.   So, if you have a $1500 liability, you can only take $1500 of the credit, but then, yes, you can also get a $1000 refund for the child tax credit is you qualify.

[Mazzinator]

Oh, ok. I see what you're saying. Once they're grown you'll no longer have them as exemptions (not just as a credit) so you guys would have to have taxes owed to get the savers credit. Sorry i misunderstood..i'm still trying to learn ;)